Navigating Tariffs: Protect your Bottom Line with Contracts

As businesses brace for the impact of tariffs as high as 25% under the new administration, they face three primary options: absorb the cost increases, pass them on to customers, or develop strategies to offset rising expenses. The latter is the most strategic approach, ensuring companies remain competitive without burdening customers or disrupting their supply chains. 

Contracts serve as powerful instruments in this effort, providing businesses with a legal framework to restructure supplier ecosystems, minimize disruptions, and safeguard against unpredictable economic shifts driven by global governments.

Restructuring Supply Chains

“Consumers likely won't be receiving the full impact of the tariffs because every stakeholder along the supply chain absorbs a portion of the shock, from the supplier, manufacturer, transporter, to the final retailer,” said Yossi Sheffi, Director of the MIT Center for Transportation and Logistics, in a recent interview with Business Insider.

Every supplier relationship is governed by a contract, and businesses must assess existing supplier agreements to determine their exposure to increased costs. By carefully reviewing termination clauses, companies can identify opportunities to renegotiate terms or transition to new suppliers in more tariff-friendly jurisdictions.

Contracts also help businesses identify where they can re-shore operations or diversify supply chains to mitigate the risks of international trade restrictions. This proactive approach allows companies to make strategic moves before tariffs take full effect, ensuring they remain agile in the face of regulatory changes. 

Minimizing the Impact of Tariffs

Adjusting supply chains due to tariffs is not without its challenges. Finding and onboarding new suppliers and negotiating new contracts requires time and resources. Delays in business can lead to logistical complications, increased costs, and potential financial penalties. However, contracts provide a roadmap to mitigate these disruptions.

By analyzing contractual data, businesses can predict potential delays and take preemptive action to minimize negative effects. For example, companies can negotiate shorter lead times, ensure service level agreements (SLAs) are clearly defined, and secure contingency plans within contracts to avoid operational bottlenecks. Additionally, contract management platforms can be utilized to streamline renegotiations, ensuring new agreements align with the company’s financial and operational goals.

Safeguarding Against the Unpredictable

Tariffs introduce uncertainty into business operations, making it essential for companies to have safeguards in place within their contracts. Two key contractual elements that can help businesses navigate these challenges are force majeure clauses and price adjustment provisions.

Force majeure clauses, traditionally invoked during unforeseen disasters, have evolved significantly since the COVID-19 pandemic. Given the potential for tariffs to make performance impossible or unreasonably expensive, businesses must review their contracts to determine whether these clauses can be triggered in response to sudden trade restrictions. By clearly defining tariffs as qualifying events under force majeure, companies can create a legal safety net to protect against significant financial losses.

Similarly, price adjustment and escalation clauses are crucial in managing variable costs that extend beyond inflation. According to the National Law Review, “a price escalation clause, where parties agree at the outset of a project to specific terms and mechanisms to address inflation (in this case imposed by tariffs), is the best solution.” These flexible provisions allow businesses to renegotiate prices with suppliers in response to changing economic conditions, ensuring they are not locked into agreements that become financially unsustainable. 

Looking Ahead

In an era of shifting trade policies and economic uncertainty, businesses must take proactive steps to mitigate the impact of tariffs. By leveraging contract data and provisions, businesses can move forward with agility and resilience, ensuring long-term sustainability in a complex global market. As trade policies continue to evolve, companies that strategically utilize their contracts will be best positioned to thrive in the face of change and maintain business continuity despite economic fluctuations. 

Ready to read more? Check out Powering Profitability: The new economics of customer and supplier relationships.